Telcos are Not Suicidal

I’ve finished reading Bill Herman’s paper. It’s got a lot of interesting material in it, so I’ll be discussing it in several posts over the next few days.

Having finished the paper, I remain convinced that Herman hasn’t given much thought to the details of how the discriminatory pricing regime he envisions would actually work. He seems to imagine that AT&T can simply send Google a bill for ten million dollars and Google will whip out its checkbook and pay it. This, it seems to me, is highly improbable. To see why, let’s look at the other end of the market—the millions of tiny websites like this one that are only frequented by a few hundred people every day.

The remarkably low cost of Internet production puts it within the reach of most Americans, skill permitting. A personal Web site costs less than four dollars per month to host; in many cases, Web hosting space is included with a broadband subscription. Millions of people, including people who otherwise produce and distribute no media, host Web sites for fun, for self-expression, or for some higher social purpose. Much of it is for vanity and amusement, but tens of thousands of gifted artists, seasoned experts, and enthusiastic hobbyists post irrefutably valuable content. Including both the fun and the serious reasons to love the Internet, these millions of hours of unpaid labor add incalculable value to our economy, not to mention our enjoyment of life and our democracy. In many endeavors, the dream of nearly frictionless transactions has been leapfrogged by the reality of nearly costless transactions and an entire subeconomy of “peer production and sharing.”

Adding even a small amount to the cost of these millions of nonmarket actors’ participation would cause more deadweight losses. Slowing or blocking their Web sites would likewise diminish their willingness to devote their time and energy to building the value of the network for no compensation, again piling up deadweight losses. Yoo supports the attempt by BSPs to capture all of the marginal value of increases in the worth of their networks, but a great deal of this value is produced for no direct economic gain. If BSPs attempt to capture the positive value of things that are not being bought or sold, they will kill the goose that laid the golden egg–or at least seriously reduce her golden egg production.

Now, Herman is absolutely right that these millions of sites are absolutely essential to the success and vibrancy of the Internet. Almost everyone who uses the web visits at least one of these sites, and many us visit dozens on a daily basis. I personally would cancel any Internet service that didn’t allow me to reach my favorite blogs, most of which are in the small-scale, non-commercial category Herman describes here.

Moreover, Herman is correct that most of these sites wouldn’t pay tolls to multiple third-party ISPs so their customers could reach them. I’m pretty sure we at TLF wouldn’t. We’re very happy we have a non-trivial number of readers around the country, but we do this blog as a hobby and none of us is rich. Moreover, a lot of our readers read the blog at work, and the market for higher-speed business connectivity tends to be rather more competitive than the home market, so we’d figure most of our readers could get us at work.

OK, so Herman and I agree that an ISP attempting to charge millions of website owners for the ISP’s customers to reach them would dramatically lower the benefit of Internet access for those users while generating very little revenue from ISPs (since most of them wouldn’t pay, and the ones who do pay aren’t going to pay very much). But it seems to me that for precisely those reasons, an ISP would be crazy to attempt such a stunt. Keep in mind that even a monopolist has some constraint on the price he can charge for a service, and that price is directly proportional to the perceived benefit of the service provided. Instituting policies that dramatically reduce the perceived value of a company’s services will reduce that company’s revenues, even if that company has a monopoly.

So I just don’t understand what Herman thinks is going to happen. It seems totally nuts to imagine AT&T sending Adam Thierer a bill saying “send us $10/month or we’ll cut off access to your site for our customers.” Adam wouldn’t pay it, but he would write a long, angry post denouncing AT&T, and then I imagine AT&T would get some angry phone calls from any TLF readers who happen to be AT&T customers.